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Is An Oil Price Recovery In The Making?

U.S. West Texas Intermediate crude oil futures are trading lower for the week, but a rally on Friday has helped the market erase most of its earlier losses. The highlight of the week has been the heightened volatility associated with an escalation of tensions between the United States and China.

This current elevated tensions actually started on August 1 when President Trump announced new tariffs against China. Volatility rose on this news, but spiked even higher when China retaliated by dropping its currency below the psychological 7 yuan to the dollar level and canceling all agricultural deals it had with the United States.

Concerns over a slowing economy then prompted the Reserve Bank of New Zealand to shock the markets with a 50-basis point rate cut in its official cash rate. This drove global bond yields sharply lower, while triggering fears over a global recession.

Worries about a recession increased the chances of lower crude oil demand, driving prices sharply lower. That steep break pushed prices to multi-month lows, but since that initial bearish reaction, the market has recovered more than half its losses on reports that OPEC would cut production to support prices.

Barring any further bearish developments between the U.S. and China, the news of an OPEC production cut could provide short-term support.

U.S. Energy Information Administration Weekly Inventories Report

On Wednesday, the U.S. Energy Information Administration (EIA) reported a build of 2.4 million barrels in U.S. stockpiles versus analyst estimates of a 2.8 million draw. U.S. crude oil inventories are about 2% above the five-year average for this time of year.

Gasoline inventories rose 4.4 million barrels, with U.S. Gulf Coast gasoline stocks hitting the highest on record for this time of year, the EIA data showed.

After seven weeks of consecutive crude drawdowns, “there was a thought that today’s report would turn oil’s fortunes around, “ said John Kilduff, partner at Again Capital LLC in New York. “That support got taken out of the market.”

Earlier in the week, the EIA reduced its forecast for U.S. demand for crude and liquid fuels. The agency also cut its forecast for global crude and liquids consumption by 0.1% for both 2019 and 2020.

Meanwhile, U.S. crude production was set to rise 1.28 million bpd to 12.27 million bpd this year.

IEA Cuts Demand Growth Forecast

On Friday, the International Energy Agency (IEA) cut its global oil demand growth forecasts for this year, citing fears of an economic downturn. The energy agency now expects oil demand growth to reach 1.1 million barrels per day (b/d) in 2019 and 1.3 million b/d in 2020. That constitutes a downward revision of 100,000 b/d for this year and 50,000 b/d for next year.

In its closely-watched monthly oil report, the IEA said there was “growing evidence of an economic slowdown” with many large economies reporting weak gross domestic product (GDP) growth in the first half of the year.

“The situation is becoming even more uncertain,” the IEA said, before describing global demand growth in the first half of the year as “very sluggish.”

“Meanwhile, the prospects for a political agreement between China and the United States on trade have worsened. This could lead to reduced trade activity and less oil demand growth.”

Looking ahead, the IEA said the outlook for oil demand growth is “fragile,” with a greater likelihood of a downward revision than an upward one.

OPEC May Cut Production

WTI crude oil prices are being supported on Friday by expectations of more OPEC production cuts.

CNBC is reporting that Saudi Arabia plans to maintain its crude oil exports below 7 million barrels per day in August and September to bring the market back to balance and help absorb global oil inventories, a Saudi oil official said on Wednesday.

Additionally, the United Arab Emirates also will continue to support actions to balance the oil market, energy minister Suhail al-Mazrouei said in a tweet on Thursday.

The minister said the OPEC and non-OPEC ministerial monitoring committee would meet in Abu Dhabi on September 12 to review the oil market.

Bearish Wildcard

There is a wildcard out there. It’s China’s interest in U.S. oil. Recently data showed Chinese buyers renewed their interest in U.S. crude, as imports climbed to a nine-month high of 247,000 barrels per day, according to the Energy Information Administration (EIA).

This, however, may have been a goodwill gesture tied to the on-going trade negotiations. Because of the increasing tensions between the two countries, China may decide to dramatically reduce its intake of U.S. crude imports. This could trigger another steep break in prices.

Technical Analysis

Weekly September West Texas Intermediate Crude Oil Technical Analysis

September

The main trend is down according to the daily swing chart. The downtrend was reaffirmed this week when sellers took out the previous main bottom at $50.91. A trade through $50.52 next week will signal the return of sellers. This could lead to an eventual test of the low of the year at $44.66. The main trend will change to up on a trade through $61.02.

The short-term range is $44.66 to $65.92. Its retracement zone at $55.29 to $52.78 is controlling the near-term direction of the market. This zone was straddled all week indicating traders thing it is an important area.

Trader reaction to $55.29 to $52.78 is likely to determine the direction of the market during the upcoming week.

The main range is $74.44 to $44.66. If the momentum shifts to the upside then its retracement zone at $59.55 to $63.06 will become the next upside target.

Weekly Forecast

Based on last week’s price action, the direction of the September WTI crude oil market this week will be determined by trader reaction to the 50% level at $55.20 and the 61.8% level at $52.78.

Bullish Scenario

A sustained move over $55.29 will indicate the presence of buyers. If this move can generate enough upside momentum then we could see a near-term test of $59.55.

Bearish Scenario

A sustained move under $52.78 will signal the presence of sellers. The first downside target will be this week’s low at $50.52. This is a potential trigger point for an acceleration into $44.66.

Conclusion

Last week’s price action indicates that traders are definitely following the news. Therefore, we conclude that a further escalation of tensions between the U.S and China, and additional signs of a weakening global economy will continue to put pressure on prices.

However, speculation that OPEC will cut production may limit losses. An actual announcement of production cuts could trigger a short-covering spike to the upside.


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